Investment in local base metals projects is decreasing, owing to a global slowdown in the development of new projects – a phenomenon not unique to South Africa – states financial services provider Standard Bank mining and metals executive Peter von Klemperer.
“Typically, African exploration projects are funded by the Canadian, Australian and US markets, enabling their mining companies and junior miners to list and raise equity for early-stage development,” Von Klemperer explains.
He points out that Africa is “dotted” with Australian, Canadian and US juniors, all of which are drilling holes in the ground to see what the continent has to offer.
In addition, countries such as Canada offer a big investor community that understands the risks associated with exploration.
“The South African financial market prefers to fund projects at bankable stage, which is a phenomenon that will become more challenging with the introduction of the Basel III initiative – a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk,” he notes.
The original Basel III rule, from 2010, required banks to hold 4.5% of common equity, up from 2% in Basel II, and 6% of Tier I capital of risk-weighted assets, up from 4% in Basel II.
Basel III introduced additional capital buffers, a mandatory capital conservation buffer of 2.5% and a discretionary counter-cyclical buffer, which would allow national regulators to require up to another 2.5% of capital during periods of high credit growth.
In addition, Basel III introduced a minimum leverage ratio and two required liquidity ratios.
“Exploration has typically always been the domain of junior miners that have the capital to fund small exploration programmes and, if successful, sell the project to a bigger player. This is realised across the African continent,” Von Klemperer notes.
Most junior miners operating in Africa are owned by overseas companies, owing to these countries’ stock exchanges, such as the Toronto Stock Exchange, allowing juniors to raise equity on a bankable project, compared with South African exchanges, which are structured to raise equity on the back of a developed project, he explains.
Fortunately, South Africa is strongly posi- tioned in the production of technical skills across the continent. The amount of South African technical knowledge spread across Africa is positive for the country’s equipment suppliers and engineering, procurement and construction contractors as well as engineering houses.
“These entities are benefiting from the explosion of development across the continent, such as in Zambia and the Democratic Republic of Congo (DRC) and West Africa,” Von Klemperer points out.
He adds that the South African Export Credit Agency is a big supporter of South African companies conducting business across the continent and offers incentives to ensure growth. “The South African government has played a positive role in incentivising local companies operating outside South Africa, making it easier for them to operate in some challenging jurisdictions.”
Meanwhile, Von Klemperer notes that the continued growth in the Copperbelt of Zambia and the DRC will be the biggest expe- rienced in Africa’s base metals industry. “Areas with higher grades of base metals and big deposits host the most mining activity, resulting in increased investment and, sub- sequently, growth,” Von Klemperer explains.
“The South African base metals sector is small, compared with Zambia or the DRC, owing to the lack of base metals deposits. However, the sector is benefiting from the increased demand for its skills and services across the continent,” he concludes.